Before Obama took office his soon-to-be chief of Staff Rahm Emanuel uttered these words, which every American should clearly understand: “You never want a serious crisis to go to waste.” He added: “What I mean by that is that it’s an opportunity to do things you could not do before.” (Ch. 5) That this was said explicitly, with no consequences, is atrocious. Whether said explicitly or not, however, this seems to be the policy of most politicians today. Dr. Sowell, author of Economic Facts and Fallacies, and Basic Economics, points out the consequences of Mr. Emanuel’s statement, and how true it turned out to be. Dr. Sowell illustrates the reality of the harm caused by government meddling in the housing industry, explaining the use of ‘solutions’ in order to fix imaginary ‘problems.’ “What is called a solution in politics is often simply a patch put over problems caused by previous political ‘solutions,’” as Dr. Sowell puts it.
In the Housing Boom and Bust, Dr. Sowell shows the impacts of all the major government programs in the housing industry, and their dramatic consequences. This book holds all of the relevant necessities for anybody who wishes to clearly understand the root causes of the housing crisis; including the loud cries by some experts and public officials who warned against this disaster years before it occurred.
Dr. Sowell points out the efficiency in which the government – both the Bush administration and the Obama – passed bills such as the Troubled Asset Relief Program (TARP). The idea behind this bill was apparently to ‘stimulate’ a stagnating economy, in other words, get people spending money again. However, the government throwing money at banks had the exact opposite effect; predictably this was immediately blamed on the greedy Bank CEO’s and their enormous paychecks. It seems that politicians and their media cronies can always blame someone else when the very specific plans they institute fail. The TARP money, ideally, was going to trickle its way throughout the economy. “The idea sounds fine, as most political ideas do. But the real question is: Is that what has actually happened? Is that what usually happens?” (ch4) In his book, Dr. Sowell adamantly states the answer is no, and through clear empirical evidence he proves his case. As he points out, the only real increase in spending was accomplished by the government.
There has been no worse patch instituted by the government then the imaginary problem America has had with ‘affordable’ housing. Acts such as the Community Reinvestment act of 1977 (CRA) forced banks to make loans to people with bad credit history, merely because politicians wanted to give the illusion of affordable housing for everyone, and this gave way to such ‘creative’ loans as adjustable rate mortgages (ARMS) and eventually progressing to no down payment housing. When interest rates were raised by the Federal Reserve, the first people to be hit the hardest were usually minorities, the very same group of people the government was attempting to make housing affordable for, “so much for the favor being done to minorities.” (Ch. 3)
In order for politicians to reach their goal of increased power, facts must be not only distorted, but ignored. The idea that housing was somehow unaffordable in America was first untrue, and second, increased housing prices were caused by government interference in the housing markets to begin with – a pre patch, patch so to speak. The average price for a home in America is only 3.6 times Americans average income, in Great Britain it’s 5.5 times, New Zealand 6.3, as in many other places. Before the 1970’s Americans only spent around twice as much on their home as their median income – meaning “A family dedicating a quarter of its income to a mortgage could pay off a loan for a home in a little more than 10 years.”(Ch. 2) Of course, this all changed with legislation passed in the 70’s, such as CRA.
One importance economic fact to understand is that it does not cost a million dollars more to construct a house in California as it does most anywhere else in the U.S. The reason for the extra expense is land cost. However, Dr. Sowell explicates that a vast majority of land in coastal California, among many places across the U.S., is illegal to build on, which subsequently drives up the price of the remaining land, and is a major cause to the huge increase of creative financing for home loans in these regions.
There is much misunderstanding in regards to the housing crisis. Moreover, most people don’t even know who all the major players involved are. Government organizations whose duty it was to prevent a crisis like this, such as: The Federal Reserve, The U.S. Department of Housing and Urban Development (HUD), The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac). All of these organizations were set up by the government in order to protect Americans from the catastrophe that they though was inevitable, their failure indicates not the failure of the free market – which they claim – but a failure to realize that the manipulation of the economy by the government can only lead to one horrid conclusion.
Beyond the major players involved in this fiasco are all of the economic misunderstandings of the housing market, which Sowell clears up. He covers the economic impacts of zoning laws, minimum lot size laws, open space laws, height restrictions, preservations laws, building permit laws and much more. In his explanation of the many impacts of these policies, Dr. Sowell elucidates the reality that when facts are pushed around Washington, demagoguery always trumps.
The only missing ingredient to this book seems to be its utter failure to defend capitalism on a moral ground. He makes the very loud claim that “rights are not the issue” and that “The purpose of Government is not to exercise every conceivable right it has. But to exercise whatever wisdom it has for the benefit of the country.”(Ch. 5) While his book shows every practical reason the government should leave the housing market alone, he doesn’t mention one moral reason. If it is practical, but “rights are not the issue” then doing the moral thing should be obligatory, and since there is no defense of the morality involved it is left open as to why we should only follow the practical reasoning. It doesn’t really matter that the government enlists laws like “open space laws” under the claim that we are destroying too much nature even though we only inhabit 10% of the land in The United States. The relevant moral problem is why does a government have the ability to force American’s to build their homes on more expensive land because some interest groups feel that land has intrinsic value?
Dr. Sowell has once again put forth a fascinating case study into the history of the housing crisis going all the way back to the 30’s, and despite its moral lacking it stands up as one of the few books giving a thorough breakdown of all the relevant factors regarding the 21st century housing boom and bust.
This book is available for sale on Amazon HERE for $16.47
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